Tax Bracket

What is 'Tax Bracket'

A tax bracket refers to a range of incomes that are subject to a certain income tax rate. In most income tax systems, low incomes fall into tax brackets with relatively low income tax rates, while higher earnings fall into brackets with higher rates. Tax brackets help create progressive income tax schedules.

For the 2016 tax year (taxes due in 2017), the Internal Revenue Service has seven tax brackets with slight variations for single filers, married filers, and head of household filers, resulting in 21 effective tax brackets. However, it's important to note that for 2017, the thresholds for these tax brackets have all increased slightly. For example, the lowest tax bracket for individual taxpayers is less than $9,325, up from $9,275 for 2016. And the highest tax bracket is $418,041 plus, up from $415,051 for 2016. For more details, consult the IRS's website.

How Do Tax Brackets Work?

Single filers who have less than $9,275 in 2016 taxable income fall into the lowest tax bracket and their incomes are subjected to a 10% income tax rate. Single filers who earn more than this amount have their first $9,275 in earnings taxed at 10%, but their earnings past that cutoff point and up to $37,650 are subjected to a 15% rate. Earnings between $37,650 and $91,150 are taxed at 25%, and additional income is taxed at the rate of the bracket into which it falls. As a result, tax filers often fall into more than one tax bracket.

What Is the Difference Between Tax Rates and Tax Brackets?

A tax rate is the percentage at which income is taxed, and each tax bracket has a different tax rate. Casually, people often refer to their tax brackets and their tax rates as the same thing, but as most individuals have income that falls into multiple tax brackets, this comparison is not accurate. Rather, an individual's effective tax rate can be determined by looking at the total amount of tax paid as a ratio of his income.

To illustrate, imagine an individual earns $500,000 per year. At this income level, the tax filer has earnings that fall into every tax bracket for single filers, and he pays a number of different tax rates. While he pays 39.6% on his earnings over $406,751, he only pays 10% on the first $9,075 of their earnings. As a result, his effective tax rate is likely somewhere between these two percentages.

Tax Brackets and Progressive Taxation

Tax brackets yield a progressive tax system, in which taxation progressively increases as an individual's income grows. This contrasts with a flat tax structure, in which all individuals are taxed at the same rate, regardless of their income levels.

Proponents of the use of tax brackets and progressive tax systems contend that individuals with high incomes are more able to pay income taxes while maintaining a relatively high standard of living, while low-income individuals struggle to meet their basic needs and should be subject to less taxation. Furthermore, the use of tax brackets has an automatic stabilizing effect on an individual's after-tax income, as a decrease in salary is counteracted by a decrease in tax rate, leaving the individual with a less substantial decrease in after-tax income.